<PAGE>
POLYNOUS GROWTH FUND
SEMI-ANNUAL REPORT
January 31, 1997
Polynous Capital Management, Inc., Investment Adviser
(800) 924-3863
<PAGE>
Dear Shareholder,
It is with great pleasure that I write the initial semi-annual report for the
Polynous Growth Fund. The establishment of our mutual fund has long been a
significant personal goal and to have had the fund greeted with such enthusiasm
by our initial shareholders is something for which I will always have great
appreciation.
The past year has been filled with a great sense of accomplishment for both
myself and my associates at Polynous Capital Management, the fund's adviser.
When we started our firm in May 1996 after leaving our previous employer, we
had no existing clients and the mutual fund was not going to begin operations
until August. Currently, however, in addition to the support of our mutual fund
clients, the firm also has over $30 million in additional assets under
management.
Starting a new firm and a new mutual fund has taken a tremendous amount of time
and work but the effort involved has not been noticeable given our satisfaction
in starting an organization from a clean sheet of paper. As opposed to the
compromises that are inevitably required when being part of another
organization, one of our objectives in starting our own fund is that we can
implement our own high standards for investment management excellence with no
compromises. Our standards also produce our belief that our industry allocates
too many resources to marketing activities and not enough to investment
management activities. With our own firm and fund we have chosen to allocate
only minimal resources to marketing activities and to instead focus essentially
all our resources on investment management activities.
Our investment process, the Polynous "Dynamic Value" process of research and
portfolio management also requires a significant allocation of resources. In an
era where many investment decisions are based simplistically on momentum,
concepts, themes, quarterly earnings comparisons, or the recommendations of
others, our decisions are based only on our own original research which is
performed internally by myself and our two analysts, Eric Wold and Donald
Clark. Our seven-step research process is applied to every company under
consideration for the fund's portfolio. Our five-step portfolio management
process controls the composition of the fund's portfolio and our buy and sell
decisions. We believe our firm offers one of the most structured, controlled,
and disciplined investment processes for growth stock investing.
One disadvantage of our investment process, however, is that our original
research and return-oriented buy discipline do not typically result in our
investing in stocks that may be popular currently. Over many years, I have
found that the stocks we buy using our process perform well over a one-to-two
year period but may be unnoticed by other investors for the first three-to-six
months they are in our portfolios. Such characteristics are not an issue for a
seasoned portfolio where there is a mix of new purchases, stock held six
months, and stocks held over 12 months but I have occasionally had sluggish
performance with a completely new portfolio.
<PAGE>
The performance achieved in the fund's first six months of operations of 8.36
percent (3.45 percent with a full sales load) was acceptable in absolute terms
but it did trail the performance of a strongly advancing market over that
period of time. The fund's emphasis on mid-cap and small-cap growth stocks
suggests that the most comparable market indexes are the Standard & Poor's 400
Mid-Cap index and the Russell 2000 Small-Cap index. These indexes had
performance of approximately 16 percent and 13 percent respectively over the
fund's initial period of operations and so we are not satisfied with the
performance we have produced to-date.
An advantage of our investment process, however, is that I have used the
process for a long period of time and have confidence in what the process can
produce. Although future performance of any methodology may differ materially
from past performance, the characteristics of the fund's current portfolio are
congruent with my typical portfolio characteristics. Although we are growth
stock investors, we also pay very close attention to company valuations. Such
attention results in the fund's current portfolio having an average
price/earnings ratio on current year projected earnings of approximately 15-
times with an average earnings growth rate of about 20 percent.
Some examples from the fund's current portfolio are as follows in a format
which lists a company's name and its current p/e ratio and projected growth
rate in parenthesis: Lone Star Steakhouse (14x, 25%), Outback Steakhouse (14x,
22%), Cabletron (14x, 25%), Dallas Semiconductor (15x, 20%), Friedman's (10x,
20%), Sports Authority (15x, 22%), and Health Systems (11x, 15%). Although our
projections will not be accurate with all companies in our portfolios, the
examples above at least offer an example of the attractive valuations that are
typical of our portfolio companies.
In closing, I would like to again thank you for being one of our initial
investors. I very much look forward to providing investment services for you
for a long period of time. Although we cannot predict or guarantee what our
investment performance will be while you are an investor in our fund, we can
give you our assurance that the fund's portfolio will continue to be comprised
of the attractively-valued, thoroughly researched companies for which we are
known.
Yours truly,
/s/ Kevin L. Wenck
Kevin L. Wenck
President
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JANUARY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------- ------------
<C> <S> <C>
COMMON STOCKS - 82.66%
BASIC INDUSTRIES/MATERIALS - 2.50%
15,000 Reading & Bates Corp.* .............................. $ 436,875
------------
CONSUMER DURABLES - 4.35%
49,200 Belmont Homes, Inc.* ................................ 461,250
20,000 Patrick Industries, Inc. ............................ 297,500
------------
758,750
------------
CONSUMER NON-DURABLES - 2.29%
9,100 Lancaster Colony Corp. .............................. 400,400
------------
CONSUMER SERVICES - 28.74%
58,800 Buffets, Inc.* ...................................... 470,400
27,500 Extended Stay America, Inc.* ........................ 498,437
36,800 Friedman's Inc., Class A*............................ 552,000
37,000 Helig-Meyers Co. .................................... 504,125
18,400 Lone Star Steakhouse & Saloon, Inc.* ................ 485,300
11,800 Metro Networks, Inc.* ............................... 277,300
15,800 Outback Steakhouse, Inc.* ........................... 361,425
31,700 Rio Hotel and Casino, Inc.* ......................... 519,088
23,500 Scientific Games Holding Corp.* ..................... 537,562
26,000 Sports Authority, Inc.* ............................. 455,000
25,000 Ticketmaster Group, Inc.* ........................... 353,125
------------
5,013,762
------------
FINANCE - 7.54%
35,200 Equity Inns, Inc. ................................... 475,200
29,800 Mercury Finance Co. ................................. 59,600
15,500 RFS Hotel Investors, Inc. ........................... 290,625
13,000 Southtrust Corp. .................................... 490,750
------------
1,316,175
------------
HEALTH CARE - 17.21%
9,200 Coherent, Inc.* ..................................... 443,900
62,400 Coventry Corp.* ..................................... 499,200
7,000 Express Scripts, Inc., Class A* ..................... 238,000
18,200 Genzyme Corp., General Division* .................... 509,600
20,600 Health Systems International, Inc.* ................. 533,025
23,500 Mylan Laboratories .................................. 384,812
13,600 Quorum Health Group, Inc.* .......................... 392,700
------------
3,001,237
------------
</TABLE>
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JANUARY 31, 1997
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<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------- ------------
<C> <S> <C>
COMMON STOCKS - CONTINUED
TECHNOLOGY - 17.55%
32,700 Active Voice Corp.* ................................ $ 482,325
12,200 Cabletron Systems, Inc.* ........................... 423,950
19,400 Dallas Semiconductor Corp. ......................... 511,675
22,400 Excalibur Technologies Corp.* ...................... 296,800
32,000 The Learning Company, Inc.* ........................ 404,000
40,900 Mentor Graphics Corp.* ............................. 424,338
31,600 Optical Data Systems, Inc.* ........................ 517,450
------------
3,060,538
------------
TRANSPORTATION - 2.48%
19,200 ASA Holdings, Inc. ................................. 432,000
------------
TOTAL COMMON STOCKS (COST $14,234,886) ............. 14,419,737
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 19.34%
$3,374,448 The Bank of New York Cash Reserve, 4.40% ........... 3,374,448
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,374,448) ..... 3,374,448
------------
TOTAL INVESTMENTS (COST $17,609,334)** - 102.00% ... 17,794,185
OTHER LIABILITIES, LESS OTHER ASSETS - (2.00%) ..... (350,402)
------------
NET ASSETS - 100.00% ............................... $ 17,443,783
============
*Non-income producing security
**Cost for Federal income tax purposes is $17,609,334 and net unrealized
appreciation consists of:
Gross unrealized appreciation....................... $ 984,973
Gross unrealized depreciation....................... (800,122)
------------
Net unrealized appreciation......................... $ 184,851
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at market value (Cost $17,609,334) (Note 1)......... $ 17,794,185
Receivables:
Investment securities sold..................................... 187,256
Capital stock sold............................................. 287,698
Dividends and interest......................................... 29,398
Deferred organization costs (Note 1)............................ 67,938
------------
TOTAL ASSETS.................................................. 18,366,475
------------
LIABILITIES:
Payables:
Investment securities purchased................................ 693,281
Capital stock redeemed......................................... 105,091
Accrued expenses............................................... 20,557
Investment advisory fees (Note 3).............................. 14,389
Other liabilities............................................... 89,374
------------
TOTAL LIABILITIES............................................. 922,692
------------
NET ASSETS:
Applicable to 1,343,537 shares; unlimited number of shares
of beneficial interest authorized with no par value ........... $ 17,443,783
============
Net asset value and redemption price ($17,443,783 / 1,343,537
shares)........................................................ $ 12.98
============
Offering price per share ($12.98/0.9550)........................ $ 13.59
============
NET ASSETS CONSIST OF:
Paid-in capital................................................. $ 16,554,364
Accumulated net investment loss................................. (28,457)
Accumulated net realized gain on investments.................... 733,025
Net unrealized appreciation on investments...................... 184,851
------------
NET ASSETS.................................................... $ 17,443,783
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENT OF OPERATIONS
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<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 12, 1996*
THROUGH
JANUARY 31, 1997
(UNAUDITED)
INVESTMENT INCOME ----------------
<S> <C>
Dividends.................................................... $ 48,078
Interest..................................................... 30,657
---------
TOTAL INCOME............................................... 78,735
---------
EXPENSES:
Investment advisory fees (Note 3)............................ 53,596
Administration fees.......................................... 21,679
Registration fees............................................ 18,917
Transfer agent fees.......................................... 13,640
Distribution expense (Note 3)................................ 13,399
Accounting fees.............................................. 9,000
Amortization of organization costs (Note 1).................. 7,062
Custodian fees............................................... 5,904
Directors' fees.............................................. 2,000
Legal fees................................................... 871
Miscellaneous fees........................................... 260
---------
TOTAL EXPENSES............................................. 146,328
Expenses reimbursed by Adviser (Note 3).................... (39,136)
---------
NET EXPENSES............................................... 107,192
---------
NET INVESTMENT LOSS........................................... (28,457)
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................. 762,238
Net change in unrealized appreciation on invesments.......... 184,851
---------
Net realized and unrealized gain on investments.............. 947,089
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $ 918,632
=========
</TABLE>
*Commencement of investment operations.
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 12, 1996*
THROUGH
JANUARY 31, 1997
(UNAUDITED)
OPERATIONS: ----------------
<S> <C>
Net investment loss.......................................... $ (28,457)
Net realized gain on investments............................. 762,238
Net change in unrealized appreciation........................ 184,851
------------
Net increase in net assets resulting from operations......... 918,632
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net capital gains............................................ (29,213)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold.................................... 19,274,800
Reinvestment of dividends.................................... 26,627
Cost of shares repurchased................................... (2,931,023)
------------
Increase in net assets derived from capital share
transactions (a)............................................ 16,370,404
------------
TOTAL INCREASE IN NET ASSETS............................... 17,259,823
------------
NET ASSETS:
Beginning of period.......................................... 183,960
------------
End of period................................................ $ 17,443,783
============
(a)Transactions in capital stock were:
Shares sold................................................. 1,560,232
Shares issued through reinvestment of dividends............. 2,107
Shares redeemed............................................. (234,132)
------------
Increase in shares outstanding............................... 1,328,207
============
</TABLE>
*Commencement of investment operations.
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for one share of capital stock
outstanding throughout the period presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 12, 1996*
THROUGH
JANUARY 31, 1997
(UNAUDITED)
----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 12.00
--------
Income from investment operations:
Net investment loss.......................................... (0.02)
Net realized and unrealized gain on investments.............. 1.02
--------
Total from investment operations............................ 1.00
--------
Less distributions from:
Net capital gains............................................ (0.02)
--------
NET ASSET VALUE, END OF PERIOD................................ $ 12.98
========
TOTAL RETURN+................................................. 17.64% /1/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s).......................... $ 17,444
Ratio of expenses to average net assets:
Before expense reimbursement................................ 2.73% /1/
After expense reimbursement................................. 2.00% /1/
Ratio of net investment income to average net assets:
Before expense reimbursement................................ (1.26%)/1/
After expense reimbursement................................. (0.53%)/1/
Portfolio turnover rate...................................... 108.68% /2/
Average commission rate paid................................. $ 0.0512
</TABLE>
*Commencement of investment operations.
+Total return calculation does not reflect sales load.
/1/Annualized.
/2/Not Annualized.
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Polynous Trust (the "Trust" ) is organized as a Delaware business trust
pursuant to a Trust Agreement dated April 10, 1996. The Trust is registered
under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. The Trust is organized to offer
separate series of shares and is currently offering a single series of shares
called Polynous Growth Fund (the "Fund"). The Fund is organized to offer
separate classes of shares and currently offers one class (Class A). The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange are valued at the last reported sales price. Unlisted
securities, or listed securities in which there were no sales, are valued at
the mean of the closing bid and ask prices. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith by the Board of Trustees. Short-term obligations
having a maturity of 60 days or less are valued at amortized cost, which the
Board of Trustees believes represents fair value.
B. INVESTMENT INCOME AND SECURITIES TRANSACTIONS. Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Cost is determined and gains and losses are based on the identified cost basis
for both financial statement and federal income tax purposes. Dividend income
is reported on the ex-dividend date. Interest income and expenses are accrued
daily.
C. ORGANIZATION COSTS. Organization costs are being amortized on a straight
line basis over five years from commencement of operations.
D. FEDERAL INCOME TAXES. It is the policy of the Fund to comply with all
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
E. DISTRIBUTIONS TO SHAREHOLDERS. The Fund will distribute substantially all
of its net investment income in December, and capital gains, if any, annually.
Distributions to shareholders are recorded on the ex- dividend date. Income
and capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
F. USE OF ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term investments, totaled
$25,119,338 and $11,640,228, respectively, for the period ended January 31,
1997.
<PAGE>
POLYNOUS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED JANUARY 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Polynous Capital Management, Inc. (the "Adviser"), a registered investment
adviser, provides the Fund with investment management services. For providing
investment advisory services, the Fund pays the Adviser a monthly fee which is
calculated by applying the following annual rates: 1.00% of the average daily
net assets of the first $100 million, 0.75% of the next $150 million, 0.60% of
the next $250 million, 0.50% of the next $500 million, and 0.40% of all
amounts above $1 billion. The Adviser has voluntarily agreed to waive its fees
to the extent total annualized expenses, inclusive of distribution expenses,
exceed 2.00% of the Fund's average daily net assets. For the period ended
January 31, 1997, advisory fees of $53,596 were paid to the Adviser and the
Adviser reimbursed the Fund $39,136. The Fund has adopted a Distribution Plan
(the "Plan"), pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended, which permits the Fund to pay certain expenses associated with the
distribution of its shares. The Plan provides that the Fund will reimburse FPS
Broker Services, Inc. (the "Distributor"), the Fund's sole underwriter and
distributor, for actual distribution and shareholder servicing expenses
incurred by the Distributor not exceeding, on an annual basis, 0.25% of the
Fund's average daily net assets. For the period ended January 31, 1997, the
Fund reimbursed the Distributor $13,399 for distribution costs incurred.
Certain officers and trustees of the Fund are affiliated persons of the
Adviser. All officers serve without direct compensation from the Fund.
<PAGE>
BOARD OF TRUSTEES OFFICERS
Kevin L. Wenck Kevin L. Wenck
Richard H. Kimball Erin Fry Sinclair
Ronald H. Kase
INVESTMENT ADVISER SHAREHOLDER SERVICES
Polynous Capital Management, Inc. FPS Services, Inc.
88 Kearny Street, Suite 1300 3200 Horizon Drive
San Francisco, CA 94108 King of Prussia, PA 19406
(800) 924-3863 (800) 528-8069
(415) 956-3384 (610) 239-4600
UNDERWRITER LEGAL COUNSEL
FPS Broker Services, Inc. Shartsis, Friese & Ginsburg LLP
3200 Horizon Drive One Maritime Plaza, 18th Floor
King of Prussia, PA 19406 San Francisco, CA 94111
CUSTODIAN AUDITORS
The Bank of New York Ernst & Young LLP
48 Wall Street Suite 1700
New York, NY 10286 555 California Street
San Francisco, CA 94104
For Additional Information about Polynous Growth Fund call:
(800) 924-3863
(415) 956-3384
THIS REPORT IS SUBMITTED FOR GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUND. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE
FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS WHICH INCLUDES
DETAILS REGARDING THE FUND'S OBJECTIVES, POLICIES, EXPENSES AND OTHER
INFORMATION.
